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Bloom Energy India Private Limited

Internal Audit Report - FY 2009 – 10 (Phase 2)

November 24, 2009


Contents

► Background & objective of review 3

► Scope of review 4

► Detailed observations

► Logistics & Distribution 5

► Manufacturing, Testing and Quality 15

Page 2 Draft – For discussion purposes only


Background & objective of review

Background

► Ernst & Young Pvt. Ltd (EY) has been appointed as Internal Auditors to undertake a review of select
processes at Bloom Energy India Private Ltd. as per the scope & terms outlined in the engagement
letter. This report presents the findings and recommendations based on our phase 2 review undertaken
at Bloom Energy India Private Ltd. for the period April to October 2009

Objective of review

► The objectives of the review were to:


► Gain an understanding of the processes and review the controls and assess potential risks in the
process
► Identify risks through walkthroughs of transactions
► Evaluate the existing controls to mitigate these risks
► Test effectiveness of controls and identify control gaps
► Suggest recommendations, as appropriate to mitigate the control gaps identified

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Scope of review

► Logistics and Distribution


► Identifying, evaluating and selecting logistics service provider
► Process for entering in to contracts with service providers
► Process for monitoring compliance with contract terms & conditions and SLAs
► Process for tracking transit time and delays
► Reconciliation of service provider bills against dispatch records
► Performance evaluation process for service providers
► Process for insurance claims (if any)
► Accounting of invoices and payment processing

► Manufacturing, Testing and Quality


► Process for tracking & verifying work-in progress
► Tracking status of process orders
► Process for tracking wastages
► Process for accounting of wastages in ERP
► Compliance with testing and quality control procedures
► Process for tracking rejections post quality control

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Detailed observations – Logistics & Distribution
Logistics & distribution policy & procedures
No vendor selection
Weak controls over
Roles & responsibilities process and services of
selection of
Typical Contents of a

only one vendor have


Logistic vendors
SOP document

been taken
Policy & Delegation of authority
Absence of a
Procedures Design The delivery & transit
system to track &
for Logistics gaps in time of shipments are
Documentation monitor shipment &
& distribution process not tracked
standards transit time

No formal contract
Performance evaluation Formal contracts
available with the
not available inbound logistic vendor

Observation Risk

► Our review of the logistics & distribution process noted ► People dependent processes
that currently there is no documented policy and ► Adhoc / inconsistent procedures followed
procedures with regard to: ► Inadequate internal controls
► Logistic service provider selection Recommendation
► Parameters for selecting and evaluating logistic ► Develop a policy and procedure document for logistics &
service providers distribution function detailing process objectives, roles &
► Standard terms and conditions of a contract responsibilities, inputs to the process, key activities,
► Criteria for evaluating the performance of a logistic management information systems, formats and SLAs for
service vendor monitoring performance of service providers
► Tracking & monitoring of service levels ► Conduct a training session to roll out the standard operating
Root cause procedures for logistics & distribution team

► Need for establishing a standard process for procurement ► Identify a process champion within logistics & distribution team
not initiated with responsibility to implement the standard operating
procedures

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Logistics service provider

Payments to logistics
service providers without a
valid contract &
documented rates

Observation Risk
► Our review of the process for selecting logistics service ► Possibility of availing services at higher rates
provider noted the following: ► Possibility of bias in selection of service providers
► Documents such as the request for quotation (RFQ), ► In the absence of a binding document/contract with the logistic
comparative quote analysis and approval authority for service provider, the company is not adequately protected
selection of logistics vendors were not available with rights/obligations and payment covenants
► No formal contracts/ agreements were entered into Recommendation
with the logistics service providers currently being ► Process for selecting logistics vendors to be defined and
used adhered to with immediate effect. All potential logistics service
► Contractual terms & conditions have not been defined providers must be identified and an RFQ must be sent
and agreed ► Quotes received must be reviewed and a comparative
Root cause analysis must be prepared on parameters such as references,
► Absence of a defined process for selection of logistics credentials, price quote, terms & conditions etc. Selection of
vendors & entering into contracts prior to utilizing services logistics service providers must be documented and signed as
of vendors per authorization matrix
► Formal contract must be entered into with selected logistic
service provider detailing contract terms & conditions

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Service levels agreements (SLAs)
Enter into a contract Shipment of goods Monitoring of SLAs
Pre defined SLAs
with the logistic service from supplier end to based on actual
defined for each route
supplier Bloom Energy India shipment time

SLAs not defined with logistic Performance of service


service provider provider not reviewed
Observation Risk
► Our review of the logistics & distribution process, noted ► Inability to track delay in delivery of shipments & transit
the following: time leading to non availability of material on the required
► SLA’s with the logistic service providers were not date
defined and documented ► Possibility of delayed deliveries going unnoticed
► Standard delivery & transit times for different routes Recommendation
are not defined with the logistics service providers ► SLA’s to be defined with the logistic service provider
► Absence of a mechanism to track shipment & transit including the following;
time. Further, online tracking of shipments is also not ► Standard delivery times & transit times for different
provided for by the current freight forwarder (Agility routes
Logistics). As a result, critical parameters such as ► Security levels & safety conditions of the
delivery & transit delays are not measured & tracked transportation equipment used
► Variance in shipment times for deliveries made (refer
► Time within which a customer query should be
annexure in next page)
resolved
Root cause
► Incorporate a mechanism to track and monitor SLA’s and
► Absence of a defined process for monitoring performance any deviations from the defined standards should be
of logistics service providers recorded and reported to the management

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Service levels agreements (SLAs)
Variations in shipment time

Significant variations
in shipment time for
shipments through
similar routes

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Freight charges
Illustrative process flow

Clearance of
goods
Link GRN with the
Selection of freight
Material receipt GRN
provider
Logistic team

Purchase Requisition for courier freight raised by material requisitioner


Logistic team unaware of duty free procurements made using courier
GRN’s raised for freight not linked with GRN raised for material receipt

Design gaps in the process

Observation
► Our review of the process of freight payments noted the ► As on October 31, 2009 total duty paid as per account
following: no. 52118 ‘Commissioner of Customs’ (Bangalore
EHTP) in Oracle system was INR 1,211,506. However,
► Absence of a process to verify whether freight has
in some instances, applicable duty was paid by the
been received for the freight invoices received from
freight forwarder & then billed on to the company. While
logistic service providers
processing payments to the freight forwarder, no
► Absence of a process to verify whether freight
bifurcation of freight charges is made between customs
charges are paid only for goods ordered from the
duty paid in Oracle system leading to inability in
supplier
tracking total duty paid and list of materials for which
duty is to be paid

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Freight charges
Root cause Recommendation
► The GRN’s raised for closure of the PO’s created for ► Intimation of receipt of imported shipments (email) to
freight charges are not linked to the GRN’s raised for be given to the logistics team by the
recording the corresponding receipt of goods stores/warehouse division
► Absence of a process to pass separate accounting ► During processing of freight invoices, the Finance
entries for freight charges & customs duty in Oracle team to provide the reference of the GRN number of
while making payments to the freight forwarder the goods received for the corresponding freight
► Absence of bill of entry documentation for duty paid invoice
shipments ► Explore the possibility of configuring Oracle to link
► Logistics team is unaware of duty paid shipments GRNs raised for material receipt & corresponding
through courier freight charges
► Documentation (material invoice, Bill of Entry & TR-6 ► Supplier invoice number, item description, material
challan) was not maintained/retained by logistics team requisitioned by, and all other relevant information to
Risk be captured on the freight invoice (freight charges) of
samples for which GRN would not be created
► Possibility of not claiming drawback on re-export of duty
paid goods ► Journal entry for customs duty paid across locations
to be posted under a separate ‘customs duty’ account
► Possibility of processing payments for shipments not
received or ordered ► Assign the responsibility of administrating courier
shipments to the logistic team
► Inability to segregate duty paid and duty free goods
(during customs audits)

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Consultant and clearing & handling agent (CHAs) contracts

Payments amounting to
INR 1,502,556 made
without a valid contract
& agreed upon rates

Observation Root cause


► Our review of the services rendered by logistics consultants ► Absence of a defined process for selection of consultants
(Supply Chain & EOU) and other Clearing & Handling Agents & entering into contracts prior to utilizing services of
(CHAs) noted the following: consultants
► Documents for selection of consultants (Supply Chain & ► Finance team is not in possession of the contract with the
EOU) were not available consultant
► No contract / agreement was entered into with EOU Risk
Consultant and other CHAs (Ex: Nippon express, ► In the absence of a binding document/contract with the
Transglobal logistics, etc) consultant, the company is not adequately protected with
► During the period April to October 2009, EOU Consultant rights/obligations and payment covenants
and the CHS agents were paid INR 1,502,556. ► Possibility of unauthorized payments being made to the
Payments were processed without valid contracts/ consultant
agreed upon rates
► Of the 5 SCM Consultant invoices reviewed, we noted
that in 3 instances (amounting to INR 179,835), specific
approvals for services received beyond the scope, as
defined in the contract, was not obtained (refer annexure
of next page)

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Consultant and clearing & handling agent (CHAs) contracts
Services rendered beyond the scope of the agreement
with Supply Chain Consultants

Payments amounting to INR


179,835 made without
specific approvals

Recommendation
► Procedures and documents, such as the request for ► For services availed beyond the scope, as defined in
quotation (RFQ), comparative quote analysis and the contract, a specific approval mechanism to be
vendor approval authority, or selecting consultants defined and incorporated prior to availing such
must be defined and adhered with immediate effect services. The approval obtained to be attached along
► A formal contract should be entered into with the with the service provider’s invoice. The Finance team
consultants. The contract should cover the scope of should check for such approvals prior to processing
service, payment terms and conditions, etc payments

► The copy of the contracts should be maintained with


the Finance team and adherence to the contract
should be monitored by the Finance team

Page 13 Draft – For discussion purposes only


Customs duty
Customs duty
Receipt of goods Inbound charges Payment
paid by DHL (as
at the customs invoice raised by processed by
per the Bill of
frontier DHL on BEIPL Finance team
Entry)

Verification between invoice


and Bill of Entry not performed

Observation Root cause


► During our review of the process of reimbursement of ► Process to approve reimbursement of customs charges
customs duty paid to DHL, we noted that there is no to DHL does not require the courier agency to submit
process to verify the customs duty amount with the Bill of corresponding Bill of Entry
Entry Risk
► During our sample review of 5 inbound charges invoice ► Possibility of excess customs duty reimbursed to the
submitted by DHL during the period between April – courier service provider
October 2009, we noted that for customs duty amounting Recommendation
to INR 34,291, the Bill of Entry was not available. Further
► Incorporate a process of verification of custom duty
on discussions with Senior Sourcing & Procurement
amount as specified in the invoice with the Bill of Entry
Engineer and Senior Accountant, we noted that the
prior to processing of the payment
reimbursement charges submitted by DHL were not
► Retain a copy of the Bill of Entry for record purposes
supported with a Bill of Entry

Page 14 Draft – For discussion purposes only